Recapitalize or New Entity After a Pivot

Last week I talked to an entrepreneur that had recently gone through a pivot where they identified a new, better opportunity and had an early product in the market. Next, they mentioned they were raising money for the new product, but that it was under a new company. Interested, I asked what happened to their old company. Did they shut it down? What happened to the paying customers? Nothing. The old company was still in business, but the team was focused on the new business.

Of course, this poses challenging questions:

  • Do you shut down the original business and tell investors their investment is worthless?
  • Do you recapitalize the original business to work on the new idea and dilute the existing investors (or create a situation where the founders have limited equity in the event of anti-dilution)?
  • Do you give the investors in the original business some equity in the new business or do nothing?
  • What obligations exist in the original business that aren’t being fulfilled if the entire team is working on a different business?

While every situation is different, a pivot typically requires difficult decisions. Most often, a pivot results in a new direction for the same company, but sometimes a new entity makes more sense.

What else? What are your thoughts on recapitalizing the original business or creating a new entity as part of a pivot?

One thought on “Recapitalize or New Entity After a Pivot

  1. If indeed a new company was formed and the team was focusing on the new opportunity while leaving the old investors behind, any potential investor in the new opportunity who does due diligence should be very wary that the team might do the same thing to them in the future. Unless the old investors agreed with the new approach or received equity in the new opportunity, I would never invest. There might even be legal problems lurking for the management team from fiduciary responsibility relative to the old company.

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